Nobody needs more stress coming from Washington. Yet another headline-grabbing conflict may be on the way: a government shutdown that could start at midnight on Sept. 30.
A shutdown isn’t inevitable, of course. But if Congress doesn’t fund the government by the start of the next fiscal year on Oct. 1, thousands of federal employees could be furloughed — and the White House has threatened to lay off workers en masse. With important exceptions like Medicare and Social Security benefits and “essential” programs and services like air traffic control, postal and military service, much of the federal government would cease doing business.
This would be a headache at best, and possibly much worse. It could be a drag on the economy at a precarious time, and the flashpoint for a knock-down, drag-out fight between Democrats in Congress and the president. There’s nothing good about this.
All that said, there is a sliver of good news here, if you are an investor. Strictly from that blinkered viewpoint, past shutdowns have been nonevents — virtually immaterial for the stock and bond markets. Whatever moved the markets in those periods, it wasn’t whether government funding stopped or started. The specific situations in each episode were what mattered.
At the moment, U.S. stock investors are riding a bull market. That momentum alone makes the short-term prospects for financial markets fairly positive, despite a looming shutdown.
There are two important caveats, however. One is that a potential shutdown not last so long that it derails a beleaguered economy. The other applies to nearly all conflicts in the Trump era: that the damage caused by this latest one not add so much stress to multiple institutions that they can’t shrug it off.
The History
Congress has a long history of creating U.S. government “funding gaps” by failing to appropriate money to keep the government running by the start of a new fiscal year. Until the 1980s, however, these episodes didn’t lead to shutdowns. Instead, the government kept operating, on the assumption that the money would eventually arrive.
That changed in the early 1980s, when U.S. Attorney General Benjamin Civiletti called for a stricter interpretation of a law known as the Antideficiency Act, which prohibited government agencies from spending money that Congress hadn’t yet appropriated.
“Ultimately, the attorney general believed government agencies had no legal means to operate during a funding gap,” an account posted by the U.S. House of Representatives said. Funding gaps began leading to shutdowns. “Eventually, federal officials carved out exemptions for government employees deemed ‘essential,’ like military and law enforcement personnel involved in the protection of life and property.” As a consequence, these workers have often had to work without pay during shutdowns — though they have been paid eventually.
Relying on data from the Congressional Research Service and FactSet, the asset management giant Vanguard tallied 21 government funding gaps of one kind or another since the mid-1970s. A separate tally by JPMorgan Wealth Management found 14 actual shutdowns of one day or more. The longest and most recent lasted from Dec. 21, 2018, to Jan. 25, 2019.
In seven instances where shutdowns lasted 10 days or more, Vanguard said, the S&P 500 “fell four times within the shutdown period and rose three times. The worst return, -4.4 percent, came during a shutdown in 1979.” The best, a gain of 9.3 percent, occurred during the 2018-19 shutdown. Vanguard found no indication that the shutdowns accounted for the rise or fall of the markets during those or other periods.
In a separate study, JPMorgan examined foreign exchange markets, in addition to the stock and bond markets, during shutdowns since the 1970s. It drew the same conclusion. “Government shutdowns have had limited impact on markets.”
The Implications
None of that means that shutdowns are unimportant.
They have added enormous pain and stress to the lives of millions of people. In the antiseptic language of economics, there has been a broad, measurable impact. In the five-week shutdown that ended on Jan. 25, 2019, for example, growth of the nation’s gross domestic product slowed by 0.1 percent in the fourth quarter of 2018 and by 0.2 percent in the first quarter of 2019, the Congressional Budget Office found. Some estimates are higher.
In 2023, when a shutdown seemed likely during the Biden administration, Goldman Sachs forecast that during a new funding impasse, economic growth would be reduced 0.2 percentage points each week, but said these effects would probably be temporary. “Growth would rise by the same cumulative amount in the quarter following reopening” of the government, Goldman said.
In short, until now, for anyone directly involved, shutdowns may have been hellish. But for the overall economy, they have had little major impact. Financial markets have generally treated them as nothing burgers.
In this regard, it’s worth remembering that government shutdowns and debt ceiling crises are different animals, despite their apparent similarities. Both involve well-chronicled congressional failures to pass legislation that is necessary for government work to continue. But debt ceiling impasses are far more dangerous.
In these, Congress fails to increase the authorization needed for the U.S. Treasury to keep borrowing money. Because the government is spending far more than it takes in, it would be insolvent without borrowing trillions of dollars. In the last debt-ceiling battle, in July, Congress raised the limit by $5 trillion — giving the Treasury leeway to borrow for another year or two. But a succession of debt-ceiling crises has already impaired the credit rating of the United States because this type of political dysfunction could conceivably cause a debt default, damaging the global economy.
Government shutdowns are ugly political conflicts, too, but they are more clearly domestic disputes. U.S. government employees and U.S. residents are the immediate victims, not bondholders, many of whom live abroad.
The Markets
U.S. financial markets seem to have become inured to political shocks lately. They have been remarkably sanguine about endless, disruptive government policies.
Take tariffs. To say that they are wreaking havoc with global trade and impairing relations with U.S. allies and adversaries around the world is, if anything, an understatement. The U.S. effective tariff rate is now 17.4 percent, the highest level since 1935, according to the Budget Lab at Yale. The Supreme Court is giving many of the tariffs a fast-track review and could overturn them, reducing the effective tariff rate to 6.8 percent. Yet if that happens, the administration vows to use other laws to ratchet rates back up again.
This is head-spinning stuff, making it nearly impossible for businesses to plan ahead — or for investors to be able to calculate the future cash flows of many U.S. companies with any semblance of accuracy. Yet financial markets have been adjusting to this state of permanent uncertainty. Back in April, when President Trump astounded the world with his “Liberation Day tariff” announcements, there were major setbacks in many global markets. But now? That’s a distant memory in the U.S. stock market, which has hit numerous new highs. The bond and foreign exchange markets have been fairly stable.
The rising risk of a government shutdown has been obvious for weeks, but there’s been minimal market reaction. And now that the Federal Reserve has resumed its long-delayed interest-rate cuts, and with corporate profits still rising and capital expenditures on artificial-intelligence infrastructure growing, the U.S. stock market’s upward momentum is a powerful force.
But the accumulation of crises could make this time different. Even if government shutdowns themselves aren’t all that alarming, it’s possible in the current climate, that once one starts, it might be difficult to end it. The economy will be dinged if a shutdown lasts a long time, and further layoffs could permanently render more government agencies unable to function effectively. The fracturing of the country into political factions, already well underway, could reach a new and incendiary level.
How serious might the overall damage be? I don’t really know, nor does anybody else. But the mounting, overlapping crises that characterize the Trump administration make it difficult to avoid the conclusion that hazards are increasing appreciably.
Remaining fully invested in global stocks and markets, using low-cost, diversified index funds is the approach I favor, and I’m not planning on changing it because of the possibility of a shutdown now.
But I’ve begun to hold more liquid assets than usual in safe places — like high-yield savings accounts and money market funds — in case the situation worsens. A protracted shutdown, coupled with other domestic and international crises, could certainly set off market volatility. In such moments, cash can be a balm. I’m hoping for calm days ahead, but taking steps to preserve my composure.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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